Contrasting Revenue from a Time Period Immediately before the Period at Issue is an Established Method of Proving Revenue for a Lost Profits Damages Calculation

Homoki v. Conversion Services, Inc., et al., 717 F. 3d 388 (5th Cir. 2013)
United States Court of Appeals, 5th Circuit: Opinion Delivered May 28, 2013

David Homoki (“Homoki”), d/b/a Global Check Services (“GCS”), which sells check and debit/credit processing services to merchants, sued Electronic Payment Systems (“EPS”), a competitor of GCS, and Conversion Services, Inc. (“CSI”), GCS’s former sales agent.

In 2003, Homoki developed the “Accounts Receivable Conversion” (“ARC”) service, which allows customers to pay merchants with a down payment and series of post-dated checks that, under certain circumstances, are guaranteed by GCS. To use the ARC service, the customer and merchant must be qualified by GCS. A wide range of factors are considered for qualification, including price of the item to be purchased, the customer’s monthly income, the age of the customer’s checking account, the customer’s check writing history, and the merchant’s history. On the day of the transaction, the customer writes a check for a down payment and a number of post-dated checks that add up to the purchase price of the item. The checks are then run through a device that communicates to the merchant whether or not the transaction will be guaranteed by GCS, and, if so, the merchant receives the entire purchase price of the item directly from GCS within 24 to 72 hours.

Since 2005, CSI was under contract with GCS as GCS’s sales agent. Their 2008 contract included an exclusivity provision prohibiting CSI from selling any competing products. However, because GCS could not produce a copy of the signed contracts at trial, the existence of the contracts were disputed by CSI.

Around 2006, EPS, a competitor of GCS, became interested in developing a product similar to the ARC service, and eventually developed a competing product known as the “EPS90.” In developing the EPS90, EPS was in contact with CSI (GCS’s largest sales agent) since 2006. EPS sought to profit from CSI’s knowledge of how the ARC service was sold and marketed. Larry Stuart (“Stuart”), owner of CSI, testified at trial that, as EPS was preparing to bring the EPS90 to market, he had discussed with EPS employees how the service should function and how it should be marketed. EPS and CSI anticipated that CSI would be the sales agent for the EPS90 and, in November 2008, CSI obtained the first EPS90 sales contract. Stuart also testified at trial that, in total, he moved 8 merchants from the ARC service to the EPS90. In January 2009, CSI stopped selling for GCS. There was also testimony at trial that EPS attempted to persuade other sales agents of the GCS service to sell the EPS90, and that EPS attempted to move merchants from GCS to EPS. There was further testimony at trial that someone using CSI’s password accessed confidential portions of GCS’s computer system from computers owned by EPS and obtained confidential information relating to GCS’s merchants.

GCS brought claims against CSI for: (1) breach of contract; (2) breach of fiduciary duty; (3) fraud; (4) negligent misrepresentation; (5) tortious interference with existing contracts; (6) tortious interference with prospective business; (7) injury to business reputation; (8) computer fraud and abuse; and (9) civil conspiracy. GCS also brought claims against EPS for: (1) tortious interference with contracts between GCS and CSI; (2) tortious interference with contracts between GCS and merchants; (3) civil conspiracy; (4) business disparagement; and (5) computer fraud and abuse. Only two of the five claims brought against EPS were submitted to the jury at trial: (1) interference with the CSI/GCS contract; and (2) civil conspiracy to breach CSI’s fiduciary duty to GCS.

The jury entered a verdict: (1) awarding GCS $1.15 million in past lost profits and $1 million in future lost profits for CSI’s breach of contract; (2) awarding those same amounts of damages to GCS for CSI’s breach of fiduciary duty owed to GCS; (3) finding that EPS conspired with CSI to breach CSI’s fiduciary duty to GCS, proximately causing damages to GCS (but with no damages award); (4) awarding the above amount of damages to GCS for CSI’s fraud against GCS; and (5) awarding GCS $200,000 in past lost profits and $500,000 in future lost profits for EPS’s intentional interference with GCS’s contract with CSI. The district court entered judgment in the amount of $2.15 million against CSI and $700,000 against EPS.

EPS appealed the $700,000 judgment entered against it arguing that GCS failed to present sufficiently objective data supporting the jury’s finding of lost profits caused by EPS because the testimony of Homoki (the owner of GCS) regarding lost profits was not competent and lacked support from objective facts, figures, or data (CSI did not appeal the $2.15 million judgment entered against it). Homoki testified at trial that based on his ownership of the business for 16 years, the typical one-year duration of merchant contracts, the type of stores to which CSI was selling, and the rate of increase in the number of merchants buying GCS’s services, that GCS would have made between $1.1 million and $1.2 million of profits in 2010 if the actions of CSI and EPS had not caused so many merchants to discontinue use of the ARC service. Those figures were corroborated by income reported on Homoki’s federal tax returns, which were admitted into evidence.

Rejecting EPS’s contention that no objective facts or figures support Homoki’s testimony on lost profits, the Fifth Circuit affirmed the district court’s rulings holding that “[c]ontrasting revenue from a time period immediately before the period at issue is an established method of proving revenue for a lost profit[s] damages calculation [and that] [a]ny doubt as to the reliability of [that] evidence goes to its weight rather than its competency.”

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